Long Island: Housing Disaster Awaits

by Guest Author Keith Jurow, Minyanville

Editor’s Note: The following is an excerpt from Keith Jurow’s just-released Long Island Housing Market Report. For the complete, in-depth analysis and report, download it here.

The two counties of Nassau and Suffolk on Long Island comprise the largest suburban housing markets around New York City. Like the housing markets of NYC, those of Nassau and Suffolk Counties are also very misunderstood.

Most active sellers believe that the market has held up rather well and list their property at a rather lofty price. As in New York City, prospective buyers look at the listing price, shake their head and just walk away. The result has been extremely low sales volume at prices that cause nearly everyone to think that the Long Island market has resisted the major decline of other major metros.

This report is written to help both buyers and sellers. If you are a potential buyer, you will learn why you need to be extremely careful to avoid overpaying on a property. If you are an active or potential seller, you will understand why asking prices throughout Long Island are too high and why you must carefully determine a listing price that might actually entice buyers in your local market.

How the Long Island Housing Bubble Developed

Long Island experienced a huge housing bubble between 2000 and 2006. This never-seen-before chart was custom-made for me by FNC.com. It shows how the bubble developed in Suffolk County.

Source: FNC.com
Click to enlarge

Let me explain the chart. It is an index of sale prices for homes that had between 1,000 and 3,000 square feet of livable space. This is the heart of the Suffolk County housing market. Homes larger than 3,000 square feet are excluded.

What about Nassau County? Here is a different chart that was custom-made for me by data firm ClearCapital.com. It shows the median sale price per square foot for both single-family homes and condos.

Clear Capital Home Data Index (HDI)

Click to enlarge

This chart also needs some explaining. While it does not capture all home sales in Nassau County since 2002, it does include a significant percentage of them. The Director of Research and Analytics at Clear Capital assured me that it was very representative of the entire universe of all homes sold.

The “low tier” includes properties in the bottom 25% of prices. The “mid tier” is the middle 50%. The “top tier” comprises prices in the upper 25%. Notice that the percentage drop since the peak is greatest in the lowest price range. This is likely due to the fact that most of the foreclosed homes sold are in the lower third tier.

As with the Suffolk County chart, we can see that the median price per square feet roughly doubled in Nassau County between early 2002 and mid-2006. Prices held up until the stock market boom burst in the second half of 2007. Then both sales volume and prices tumbled and have never really recovered.

Understanding the Second Mortgage and Refinance Overhang

According to the Douglas Elliman Long Island Report written by Jonathan Miller, a total of roughly 110,000 residential homes were sold in the two counties of Nassau and Suffolk during the years 2004-2008. In October 2010, the New York State Department of Banking issued a preliminary report entitled “90-Day Pre-Foreclosure Notice Report.” Citing data from Home Mortgage Disclosure Act (HMDA) figures, it showed that a total of 270,656 mortgages were originated in Suffolk in these five years and a total of 190,395 for Nassau.

How could that be possible? This confused me for awhile. Then I finally realized that most of the mortgages from the Banking Department report were second liens and refinanced loans.

During the bubble years when prices were rapidly rising, Long Island homeowners took advantage of this by pulling cash out of their “piggy-bank” houses. Some refinanced their first mortgages, but many others took out home equity lines of credit (HELOC) which the banks were only too willing to offer. Many homeowners refinanced their first mortgages more than once and some refinanced their HELOC again to pull additional cash from their soaring equity.

These homeowners are probably regretting their decision now. It is not an exaggeration to estimate that at least 95% of those who either did a “cash-out” refinance or took out a HELOC are now “underwater.” It could even be higher. The value of their property is less than the outstanding balance on their mortgage(s). Many are so far underwater that they have opted to “walk away” from their mortgage while remaining in the property. The risk is low since the word is out that the banks are in no hurry to foreclose.

Nearly all studies that have examined the problem of homeowners with negative equity omit second liens from their examination. It is very difficult for them to match first and second liens on a property where the lenders are not the same. So the percentages that they show of underwater homeowners in any specific metro are much lower than the actual figure.

FNC is able to create this price index because it has a database of roughly 45 million appraisals for homes sold between 2000 and 2011 including square footage. Since the chart is able to include only prices of homes within a given range in size, it is able to compare apples to apples more than other indices.

You can see that prices more than doubled between early 2000 and the spring of 2006. After the peak in 2006-2007, prices have declined by roughly 1/3 through May 2011. This takes prices back down to the level of spring 2003. What that means is that nearly everyone who bought since the summer of 2003 owns a home worth less than they paid for it. My sense is that many of them have no idea that this is the case for their property.

Editor’s Note: To find out how you can access Keith’s complete analysis of the shocking details of this Federal Reserve Bank of NY report about Nassau and Suffolk Counties and the dangers the “shadow inventory” poses for home prices, see the MVP Housing Report.

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About the Author

Keith JurowKeith Jurow is one of the leading experts on the major metro real estate markets in the U.S.  For much more from Keith, see his Housing Market Report. Keith provides actionable data, charts, in-depth analysis and specific advice to help investors make better property decisions. Learn more.